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June 26, 2020  

Brigade Proposes Rescue-Capital Injections

Brigade Capital is asking investors in its collateralized loan obligations for permission to pump more money into struggling companies whose debts already are in the deals’ portfolios.

The request, which would apply only to the New York firm’s U.S. transactions, adds to a growing debate in the CLO sector. As the coronavirus crisis has weighed on many companies’ financial standings, those operations increasingly have asked lenders for additional capital.

But CLOs typically can’t do that, which can translate to less-favorable loan recoveries and less influence over borrowers than they typically would command as senior-secured lenders. And many have expressed frustration with that discrepancy, saying it leaves them at a disadvantage to other lenders.

To date, none of Brigade’s CLOs has been affected by such restructurings. Rather, the firm is acting in anticipation that they will become more common.

Its proposal: To amend the CLOs’ indentures in a way that would allow the deals to fund the additional investments with fresh contributions from their equity holders. Because those parties are entitled only to capital left over after paying more-senior bondholders, they have the most to lose if asset recoveries are reduced.

Indeed, the adjustment would allow the injections only for workouts intended to protect recoveries on existing positions. The new assets would not count toward any collateral-quality or credit-enhancement calculations. What’s more, Brigade would distribute proceeds from sales or repayments of the added positions to the equity holders only if the deal’s overall over-collateralization is sufficient. And equity investors cannot be forced to participate.

Brigade also would pay all legal costs associated with the proposed amendments.

“We are taking these steps for the benefit of our investors and it is important to us that no investor is disadvantaged by these amendments,” the firm wrote in a letter to bondholders this month.

The effort stands out because while several issuers have been pushing to add similar measures to new deals, apparently with little success, Brigade appears to be the first to suggest them for existing transactions.

The firm’s peers are watching the effort closely, most with the opinion that broad adoption of such mechanisms is necessary to put an end to CLO-unfriendly workouts. “If companies keep up these shenanigans, they are going to destroy the [broadly syndicated loan] market,” one issuer said.

A requirement that 100% of investors approve any material amendment to a CLO is a major hurdle, however. “There may be one or two deals where everyone can agree, but there’s almost no chance we’ll be able to do it on a massive scale,” another issuer said.

He added that while flexibility to participate in workouts benefits all CLO investors, the advantages aren’t equal for all of them. And banks, the biggest investors in triple-A-rated CLO notes, may be reluctant to approve any measures that could result in the purchase of equity or other securities that might put deals out of compliance with the Volcker Rule.

Excluding one pre-credit-crisis transaction and a few collateralized debt obligations, Brigade has completed 14 CLOs totaling $6.5 billion, according to Asset-Backed Alert’s ABS Database. It also maintains a smaller offering program in Europe.